Commentary on Political Economy

Monday, 24 October 2011

Keynes and the General Theory – Theoretical Origins of the Crisis-State

Really and truly I do not know how to thank the many friends who continue to visit this humble site. At the risk of having the 'Krisis' book pillaged (only joking!) and seeing how popular the discussions of Keynes and Schumpeter have proved (but believe me, friends - Nietzsche may be a lot more difficult, yet he is far more significant in terms of reaching a critique of the bourgeois Rationalisierung), I am offering here my notes on 'Keynes and the Neo-Classics', between the October Revolution and the New Deal. Fascinating stuff, I hope you agree.

Incidentally, we are now close to the 15,000th visit in only four months! Small wonder we have shot up to the top of most Google Searches on "Economics"! Ciao a tutti.

The most important distinguishing mark of neoclassical
economic theory is its pure “subjectivism”. Under the pretext of championing
“individualism” and contrasting “collectivism”, the Neoclassical Revolution is
an intransigent and powerful reaction to the rising tide of working-class
movements in Europe that contrast the rule of the bourgeoisie under the banner
of Socialism. The life-and-death problem for European bourgeoisies still tied
to feudal and dynastic aristocratic traditions of government is how “to
include” the mass of industrial proletarian workers that the First Industrial
Revolution has spawned and concentrated “dangerously”in urban industrial centres in which the
interdependence of “social labour” requires a level and intensity of political
co-ordination that the old laissez-faire attitude theorized by Adam Smith and
the Anglo-Saxon liberalists simply cannot supply. The threat of socialist
revolution is present and growing by the hour. Imponent mass parties
representing the rights of “labour” are surging in every nation and demanding
“representation”, even the opportunity to govern in their own right (!) in the
old “parliaments” that were previously the preserve of the nobles and notables.

The French and American Revolutions have made a return to
the old aristocratic order envisaged by the Congress of Vienna absolutely
untenable. When Napoleon declared to the ageing Goethe that “Nowadays, fate is
Politics”, what he meant was that the only way to prevent revolutions and to
preserve bourgeois public order is to integrate these vast “labouring and
dangerous classes” under the political banner of nationalism. The old European
state armies cobbled together and then disbanded at the whim of local “princes”
will count for nothing and be ignominiously and definitively defeated and
smashed by the new Napoleonic Grand Armee fighting with fervor and fierce
conviction for the ideals of “Liberte’, Egalite’, Fraternite’”.

The Neoclassical Revolution stubbornly and cynically refuses
to accept this new reality of the Political. Not the Political of the old
Classical Political Economy and of Liberalism in which the “equilibrium” of the
“self-regulating market” ensures simultaneously the ever-growing rational
“growth” of “the wealth of nations”, of their “common-wealths”, and at the same
time preserve a “public sphere” in which individuals may express their “free
political and religious and moral opinions” so long as these do not interfere
with the “operation of the free market” now elevated to a “science” governed by
the “economic laws” mathematically formalized with increasing accuracy and
rigor by the neoclassical school from Gossen through to Menger and Jevons, and
then to the opposing extremes of mathematical formalism with Walras and of
institutional practice with Marshall.

Just as the real subsumption of the production process by
the bourgeoisie requires the accumulation of value the better to be able to
combat the antagonism of workers to the wage relation, so this growing
“intensification” of the labour process to maximize profit entails the
“rationalization” of every aspect of social life – at first only those aspects
connected with the process of production inside the workplace, but later also
those aspects of social conduct that have to do with consumption and
distribution and also with the supply of resources horizontally and vertically
for production. This process of “rationalization” proceeds with the
“quantification” and “measurement” of every aspect of individual and social
life. Because the satisfaction of the growing needs of the workforce is seen as
the increase of “wealth” due to rationalization, both Classical Political
Economy and the Neoclassics see the discovery of mathematical relationships
between production and distribution of the product as vital to determining the
most efficient methods of production consistent with the most equitable
distribution of the product. The question for economics is to define “wealth”,
to describe its efficient distribution in proportion to the contribution of the
various factors of production.

In the best of his “Essays In Biography”, Keynes describes
with a brilliant simile the peculiarity of Marshall’s approach to the mathematical
methods to be applied to economics:

Jevons saw the kettle
boil and cried out with the delighted voice of a child; Marshall too had seen the kettle boil and sat
down silently to build an engine. (pp.155-6)

For Marshall,
Jevons has merely suggested a formal mathematical framework of interpretation
of a given social reality – a “concrete truth”. But this “framework” must in no
guise be mistaken for a “universal truth”: it is merely an “economic dogma”
because, as Marshall well knew, “utility” itself is a purely “subjective”
notion and, as such, far form leading to “concrete truths”, it may well
represent the height of irrationalism, it may amount to nothing more than sheer
“metaphysical dogma”. All one can do is to construct “an engine”, a “tool” or
instrument for the discovery of those “regularities” of social behaviour that
can guide enlightened public policy.

While attributing high and transcendent universality to the
central scheme of economic reasoning, I do not assign any universality to economic
dogmas. It is not a body of concrete truth, but an engine for the discovery of concrete
truth. (p171)

(Keynes himself in the General Theory will not renounce the
reactionary irrationalism of marginal utility theory: instead, he will compound
it with his own brand of mysticism dragged to the cynical depths of “animal
spirits” and “uncertainty” – and indeed of “black magic” as in his strangely
sympathetic portrait of Newton’s arcane experimental practices in these
‘Essays’.)

The essential point to grasp here is that both theories of economics – the
neoclassical and the socialist - take “the factors of production” as given:
they differ only in how the actual “output” ought to be distributed (socialism)
and about the effects of “political intervention” on the operation of the
market (neoclassic). In both cases “the economy” is seen as a “given” set of
technologies and a “given” set of “inputs” that can only result in a “given
amount of output”. In this way, the early reflection on “economic science” is
“locked out of the factory”, as it were; it does not scrutinize the process of
production; like Marshall, the economic “socialists” (who form in fact the vast
majority of “economists”) are concerned not so much with the inequality of
income but rather with the inequality of opportunities. In other words, it is
the “interference” with the proper operation of “the economy” – the production
of goods and services and its “fair” sale on the market – that concerns
economists: there is no notion on either the socialist or the “liberal” side
that “the economy” itself, the process of production, involves an “impossible
exchange”!

The economy therefore is seen as a “mechanism” that
functions “objectively” in terms of “inputs” and “outputs” whose “quantity” can
be determined “mathematically”. The economy can function “automatically” like a
machine; it cab be operated “scientifically”, as in a laboratory experiment, for
the greatest good of the greatest possible number. The “utility” of the
individual matches therefore the implicit utilitarianism and egalitarianism of
the Sozialismus: it is under this deception that the workers’ movement will labour from its inception to the present
day. Yet it is quite evident that “the economy” does not operate automatically
because it is subject to violent fluctuations and investment cycles that shake
society from booms of full employment and prosperity to busts of high
unemployment and depression. It is equally obvious that these “deviations” from
what ought to be an “objective mechanism” manageable “scientifically” must be
caused by some “interference” that relates not to the process of production
itself but rather to the “distribution” of the “industrial output”.

The “hiatus”, the “gap”, lies between the moment goods are
produced and the moment they are purchased: the process of production itself is
not even remotely put in question
either by the promoters of Socialism or by their “bourgeois” counterparts. The
fact that the means of technology utilized in production and the “goods”
produced for consumption (and therefore also the “materials” used for their
production) may be the result of political antagonism, that they may “embody”
the antagonism of the wage relation, does not in the least surface among the
considerations of “economic analysis” either Classical or Neo-classical. But
this “hiatus” that leads to the frequent “observable crises”, to the cycle of
boom and bust of capitalist industry, and so of output and employment – this
“hiatus” has to do either with the excess of consumption on the part of workers
whose wages are excessive or else it is caused by the excess of investment on
the part of capitalists whose unusual “profits” lead straight to
“overproduction” or “underconsumption” on the part of workers whose money wages
are insufficient to consume the product. In either case it is the presence of
“money” that clearly causes the distortions, the “discrepancies” between production
and consumption that cause “the economy” to sway from excessive production to
excessive consumption, with corresponding falls in profitability, investment
and employment.

In this framework of analysis of capitalist production and
society, whether it is the Socialists who condemn capitalism for its
“anarchical”, “unplanned” excesses that cause misery for the unemployed, or
whether it is the laissez-faire liberals who blame “political interference” and
the misguided attempts by “Socialist” governments to interfere with the free
market operation – in both cases all
“economists” can agree that it is the presence of “money” as the “veil”,
the “intermediary” between production and consumption, that is – as it always
was from the dawn of Christianity – “the root of all evil”.

Two central features emerge then from the peculiar
Weltanschauung that both Socialism and Liberalism come to share at the end of
the nineteenth century and at the beginning of the last one: the first is that
“the economy” is a sphere of social activity that can function “automatically”
and that is governed by “objective economic laws” provided that these are
allowed to operate freely; the second is that the objective operation of the
economy must be managed and planned scientifically by the State, for the
Socialists, or, for the Liberals, it must be allowed to work through the
self-regulation of the market without interference from the State. The role of
the State “to regulate” the economy is achieved therefore through the monetary
medium, either through the control of the monetary mass and the interest rate,
or else through social policy that redistributes income between the social
classes, or else still through direct intervention by the State in the economy
through policies aimed at “buffering” the extreme swings of the market economy.

Neither in the Socialist vision of Economics, nor in the
Liberal one is there any room for the State as a rightful “factor” in economic
analysis: for both political positions, the State remains “external” to the
operation of what is seen as a “market economy” whose only “disturbances” or
“crises” are derived not internally from production but externally through
distribution – distribution that boils down ultimately to “monetary” factors,
whether in terms of monetary magnitudes or of monetary redistribution of income
through fiscal intervention by the State. The idea of the State as an essential and necessary component of the
economy was as foreign to laissez-faire liberalism as it was to the most
revolutionary members of the Linkskommunismus. True it is that the Leninist
faction of the Second International advocates a “dictatorship of the
proletariat”. But this “dictatorship” is the equivalent of changing the drivers
of the same vehicle: the idea that subtends all Socialist dogma from Proudhon
to Social Democracy and Bolshevism is that the proletariat will take over the
capitalist machinery of production to run it in its own interests. There is no
suggestion that the social relations of production and, with them, both the
means of production and the products and the methods of consumption and
distribution will change as well! Even Lenin’s extensive pronouncements on the
strategy and tactics of the revolutionary party will limit themselves precisely
to these “strategies” in favour of the “skilled workers” who are being
“supplanted by machines” and whose “artisanal skills” are lost to the universal
alienation of Taylorism (lampooned by Charlie Chaplin in ‘Modern Times’) and
loss of “totality” in the labour process that only the proletariat as “the
individual subject-object of history” can restore! (Lukacs) It was Lenin after
all, and now the fact should not seem so surprising, that “Politics is a
concentrate of Economics”.

Lenin has no doubts that his Bolshevik Revolution represents
a leap too far – such is the “backwardness” of Russian capitalism that its
“economy” will have to be “upgraded” to the level of technical and managerial
leadership of German industry (see his ‘The Development of Capitalism in Russia’).
But the October Revolution of 1917 will offer Keynes as early as the Versailles
Treaty conference (cf. his explicit reference to Lenin in ‘Economic
Consequences of the Peace’) with the “challenge” that Leninism represents for
Western capitalism: here is the first and most troubling epoch-making historical
and social evidence of the fact that “the economy” cannot be separated from
“society” and that the Political in the final instance can destroy what had
seemed until then to be “the economic laws” of any social organization. (Absurd
must have seemed to Keynes the farcical attempts of Von Mises and Hayek “to
prove the impossibility of a socialist economy” (!) in response to Bolshevism,
written as early as the late 1920s –cf. Mises’s book, Socialism and introduction by Hayek.)

We will look in more detail at the effect of the New Deal on
Keynes’s General Theory in our next
piece. For now, let us end this discussion with the interesting parallel of the
effect that the Bolshevik Revolution had on the two highest exponents of
bourgeois economics in the 1930s – an effect that was only to be reinforced by
the advent of the Rooseveltian New Deal as a portentous capitalist response to
the Leninist challenge. Both Keynes and Schumpeter, in fact, who up until that
time had confined themselves to critiques of neoclassical theory that were more
in the nature of “cosmetic” improvements or corrections and who had shared
unquestioningly the schema that we have presented here of a capitalist economic
“mechanism” independent of politics and the State, following these two epochal
“revolutions” in the institutional asset of the nation-state – one Leninist and
the other Rooseveltian – transformed their own theoretical approaches to
include precisely the possibility – and indeed the inevitability – of a
fundamental role of the State, of the Political, in the essential operation and
functioning of any Economy. After the Red October and after the Hundred Days,
it seems, the old bourgeois illusion of the epistemological separation of
Economics and Politics – of their “homologation” in separate spheres of social
reality – becomes absolutely impossible. “Lenin is quoted as saying,” relates
Keynes in the ‘Economic Consequences of the Peace’ (but the statement has never
been corroborated, “that the best way to undermine a country is to debase its
currency.”

http://www.scribd.com/doc/51671231/keynes-and-the-capitalist-theory-of-the-state (This is an almost literatim - but strangely unacknowledged - translation of a brilliant piece on Keynes by Antonio Negri first published in Operai e Stato. The translation and some unauthorised intrusions make the reading sound more "triumphalist" than was even the original. But it is a useful review that some of you may wish to peruse.)